Linking local commerce to the Web has emerged as one of the fastest growing sectors in today’s Web economy. Each day we see a new startup in the online-to offline space, with each player wanting to change how consumers find and pay for services, and tap into the trillions of dollars spent in the local, real world economy.

Today there are online marketplaces to help you wash your car, get a ride, clean your house, or find a place to stay. Each startup is choosing its own formula to link the Web with the real world. Having watched the space closely for the past couple of years, here are a few elements that indicate long-term success in the space:

Transactional wins over lead-generation

Most Web 1.0 marketplaces focused on lead generation as their business model, with users finding a potential service provider online then negotiating the details of the transaction offline. Newer online marketplaces are closing the loop by adding a payment/transaction piece to the directory marketplace.

Transactional marketplaces enjoy an advantage over lead generation approaches when it comes to business model and customer experience. Why? Transactional environments offer a greater potential for a high life time value (LTV) per user, as customers continue to return to the service for future needs. As long as a user gets all the important information upfront (cost, availability, trustworthiness of vendor), there’s no reason why he or she would want to negotiate a service transaction away from the site.

By contrast, marketplaces with a lead generation approach tend to have a tougher time achieving a high LTV, as they connect the user to the service provider – and often will not see that user again.

Horizontal vs. vertical?  

Local marketplaces vary widely in terms of scope – from the very niche to generalists. A new generation of online marketplaces is popping up to fulfill specific needs in niche verticals. DogVacay goes after the pet sitting vertical. Housekeeper.com helps people find cleaners. Zocdoc connects you with doctors, Weddingful with wedding vendors and Urbansitter with babysitters. On the other end of the spectrum sit Angie’s list, Taskrabbit, Zaarly, Craigslist and other sites that tackle a whole range of diverse categories.

Broadening the focus to multiple categories usually increases the revenue potential per customer, but can also make it more challenging to build a brand and effectively communicate the value proposition to users. Niche marketplaces that fulfill a specific need can quickly ramp up and build their user base.

Unique inventory – the case of p2p marketplaces

Most online-to-offline marketplaces focus on connecting customers more effectively to existing suppliers and inventory. Even more value can be created if a marketplace has access to new and unique inventory. This is the case of p2p marketplaces like AirBnB, GetAround or Zaarly. Especially AirBnB has greatly benefited from ‘word of mouth’ sharing as it brought often inexpensive housing inventory to the marketplace.

Closed markets give a better customer experience

Most marketplaces are open to any supplier that wants to sell its services. However, some companies have chosen to tame the vast masses of participating vendors by taking complete control of the supply side. Uber and Cherry have taken this approach to transportation and car washing respectively.

These closed markets help guarantee a consistent customer experience independent of the suppliers delivering the service. It’s particularly important to control the supply base for on-demand services like Postmates or TaskRabbit’s on-demand courier services.

Demand-driven markets are a new twist

Traditional marketplaces are typically supply-driven: providers look to attract customers by advertising their services. However, companies like Taskrabbit, Zaarly and Done are turning this model upside down, letting users list the things they need to get done.

While this demand-driven approach offers an interesting twist, it can be inherently harder for these marketplaces to gain traction early on as they rely on the initiative of users to stretch their thinking in terms of what to ask for.

Summary

While a few marketplaces for offline services are emerging as early winners, with AirBnB, Zocdoc, Care.com and Uber being the most prominent examples, the space still remains wide-open for new entrants with new approaches. With trillions of dollars in local consumer spending that could be made online, I continue to be excited about that space and look forward to watching the next generation of transactional online-to-offline startups tackle complex service offerings and new areas.

Related articles

• Zaarly API Connects Offline to Online (programmableweb.com)
• TaskRabbit takes on another $13 million in funding as investors bet big on peer-to-peer marketplaces (theverge.com)